Could Obamacare’s Failure Lead to Single Payer?

Ezra Klein and Ross Douthat have both written pieces recently arguing that the failure of the Affordable Care Act could lead towards a more liberal form of universal health care. The idea goes that if HealthCare.gov doesn’t become feasible, people will begin looking at which parts of the law were successful and which weren’t. The Medicaid expansion has thus far been a success in the states that have expanded. Government-run online marketplaces? Not so much. That’s a problem for conservatives, because many of their leading health care plans would require those online marketplaces. If those are deemed a failure, what’s their next proposal? Meanwhile, the liberal fantasy – Medicare for all – is much closer to the Medicaid expansion. The appetite for universal healthcare would still exist and now single payer would be the clear solution. Klein and Douthat both see this as a distinct possibility. Is it?

There are a couple of reasons to be skeptical.

First, if Obamacare fails, it’s going to hurt Democrats badly. Time and time again House and Senate Democrats have thwarted government opposition to Obamacare. They’ve refused to defund or delay the law or the individual mandate. Republicans, of course, have done the opposite. If the exchanges don’t work, Republicans will earn major points with voters. This has been the leading battle for years now. Democratic candidates will have a lot of trouble fighting off attacks that they stuck with a partisan, unpopular law only to watch it collapse under its own weight once enrollment began. Like Klein, I don’t believe many things affect elections. This would.

Second, Klein and Douthat’s argument assume that Americans will be able to distill HealthCare.gov’s failure from the other parts of the law. Will they understand that the Medicaid expansion succeeded while the complex public-private partnership that created the exchanges failed? It’s not clear. Klein is one of the leading proponents that Americans don’t follow politics closely. They don’t know what’s going on in D.C. Obamacare’s failure would be a big story. But would it be big enough for people understand the causes of it? The CBO projects that only seven million people will sign-up on the exchanges next year. They will all undoubtedly see the website’s issues, but the vast majority of people will never try to login to HeathCare.gov. They may hear that Obamacare failed without knowing the causes.

Third, many Americans may see Obamacare’s failure as symbolic of government’s inability to regulate the health care market. Whatever the causes, Americans may conclude that getting government involved in the health insurance industry is a bad idea. They won’t spend much time thinking about why Obamacare failed and simply decide that enough government disruptions in the health care market.

Klein and Douthat’s argument is not impossible. Maybe Americans will be clamoring for single payer if the exchanges fail. But there are also a number of reasons why that won’t be the case. Klein and Douthat give Americans a lot of credit for understanding the root causes of Obamacare’s failure, evaluating the competing conservative and liberal health care ideas and using the Obamacare analysis to guide their decision-making. I believe most Americans will think more simplistically and see Obama’s failed law as nothing more than a failed program epitomizing the government’s inability to regulate the health care market. Let’s hope that the administration can get the exchanges working and we never have to find out.

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Sen. Orrin Hatch is Wrong on the Budget: We Need More Revenue!

Last week, National Journal hosted a policy summit on our federal budget and the deficit. The first keynote speaker was Senator Orrin Hatch (R-UT) and he repeatedly emphasized the need to cut entitlement spending to get our long-term deficit under control. He pointed out that both current federal outlays and revenue are above average compared to the past 40 years. He argued that we need to cut spending, not raise revenues:

Based on the most recent CBO (Congressional Budget Office) data, revenues are projected to average 18.3% of the economy through 2023, almost a full percentage point over the average of the past 40 years. So, despite the repeated claims that we don’t collect enough revenue, we are actually set to collect more than the historical average. At the same time, federal spending over the next 10 years will average 21.1% of the economy according to the CBO – actually, I think it will be much higher than that – exceeding the 20.4% average of the last 40 years. In other words, anyone claiming the lack of revenues is the root of our fiscal problems just hasn’t studied the numbers.

First, I’m going to correct Senator Hatch. Last week, the CBO updated its budget projections for the next 10 years. Government revenue averages 18.9% of GDP from 2014-2023 and federal spending averages 21.9%. These numbers are actually both higher than the ones Hatch cited so they actually help the Senator’s case that we need to reign in federal spending.

Second, Hatch wants to (1) keep our promises to our seniors, (2) not raise additional revenue, and (3)  get our fiscal house in order by reducing entitlement spending.  Accomplishing all three of those goals simply isn’t possible. Here’s why:

Over the next couple of decades, federal spending will be significantly higher than it has been over the past 40 years, because baby boomers are retiring. The aging of our population increases the costs of entitlements and there’s nothing we can do about that if we are to uphold our contracts to our parents and grandparents. In order to keep those promises, it’s going to require increased government revenues to fund those programs. There’s no escaping that fact.

Don’t believe me? Let’s go to the numbers:

Spending.
Those numbers come from the CBO’s 2012 Long-Term Budget Outlook*. When performing these calculations, the CBO is forced to make a number of assumptions about future policy. They do so under two different scenarios. The first, known as the extended baseline scenario, assumes that the Bush tax cuts expire, that sequestration stays in effect and that Congress will no longer pass a doc-fix each year. None of those are realistic. That’s why the CBO created the extended alternative baseline scenario. It assumes the extension of the Bush tax cuts, that sequestration will be overturned and Congress will continue to pass a doc-fix each year. Of course, we now know that the Bush tax cuts were extended for all but the wealthiest Americans, and sequestration is looking more and more like permanent policy. But this report was from June 2012 so it’s a bit out of date. However, my point still holds.

Since the extended alternative baseline scenario more closely aligns with the American Taxpayer Relief Act (which extended the Bush tax cuts) and expected future policy, I will use CBO’s projections under it. As you can see from the table above, federal spending is predicted to increase significantly over the next 25 years as a percentage of GDP and that increase is driven entirely by growth in entitlements.

The increase in entitlement spending comes from two areas: rising healthcare costs and an aging population. Fortunately, the CBO recognizes this as well and breaks down which area has a greater effect on the deficit. The report finds that 68% of rising entitlement spending is due to aging while just 32% is due to cost growth. Here’s the CBO:

Through 2022, the aging of the population will cause spending on the major health care programs and Social Security to rise significantly, CBO projects. In fact, during that period, almost all of the projected growth in such spending as a share of GDP is effectively the result of aging.

Aging remains the more important factor for a few decades following the coming one.

To demonstrate this, let’s assume that there is no excess cost growth in entitlement spending over the next 25 years (meaning health care costs grow at the same rate as inflation). Thus, the only increase in costs is from an aging population. To calculate this, we can multiply the estimated increase in Social Security, Medicare and Medicaid (6.2 percentage points) by 0.68 to eliminate all excess cost growth. The answer is 4.2%. This means that aging of the population will cause entitlement spending to rise 4.2 percentage points over the next 25 years. If you factor that in to total spending, the federal government will spend approximately 24.2% of GDP in 2037. That’s not sustainable without increased revenues.

Economists and budget wonks generally agree that the U.S. should aim for a budget deficit of 3% each year. If federal spending is 24.2%, revenues will have to be 21.2% to hit that 3% mark. That’s WAY above our historic level. It’s WAY above our current level. And this is working under the assumption that there is no excess cost growth in entitlement spending. We’ve done a better job of controlling healthcare costs over the past few years, but we’re not going to get to zero excess cost growth anytime soon.

Sen. Orrin Hatch speaks at the National Journal policy summit.
Sen. Orrin Hatch (R-UT) speaks at the National Journal policy summit.

Hatch’s claim that we have a spending problem is technically true, but it’s an unavoidable spending problem. If Hatch wants to keep revenues at 18.9% – the CBO’s prediction for the next 10 years – he would have to cut spending by 2.3 percentage points (to 21.9% of GDP) in order to keep the deficit to 3%. And that’s still assuming there’s no health care excess cost growth. Since Hatch wants to do that by cutting entitlements, he’ll have to reduce them from an expected 14.6% of GDP to 12.3% in 2037. That’s a huge cut.

To put this in perspective, two of the most common suggestions to reduce the budget deficit are to raise the Medicare and Social Security eligibility age to 67 and to switch to chained-CPI to calculate yearly changes in the cost-of-living adjustment for Social Security benefits. The CBO found that raising the eligibility age would reduce the long-term budget by 0.4% of GDP by 2035 while switching to chained-CPI for Social Security would reduce the deficit by 0.2%. That’s nowhere close to enough to both keep revenues at 18.9% and keep the deficit to 3%.

All of this is to say that Hatch and his fellow Republicans need to go back and look at these numbers again. It’s simply not possible to keep our promises to seniors, keep the budget deficit to 3% and keep revenues unchanged. Demographic changes make it impossible.

But it’s not just Republicans who believe this. To pay for our entitlement programs, we’re probably going to have to raise taxes on the middle class. We have a big gap to make up and as I just demonstrated, we can’t do it with spending cuts alone. That’s going to require everyone else to pay more as well. How many Democrats have mentioned this though? Very few. They don’t have any interest in increasing revenue as well. Right now would be a poor time to raise taxes on the middle class of course, but at some point it’s going to need to happen and most Americans have no idea that it’s coming. Years of Republicans claiming we don’t need more revenue and Democrats promising not to raise middle class taxes have lulled the country into a false belief that taxes aren’t going up. They are. An aging population requires it. It’s about time politicians revisited these numbers and stopped fooling their constituents. Either we break the promises to our seniors or we increase revenue. There are no other options.

*The CBO is releasing its 2013 Long Term Budget Outlook tomorrow. I’ll have a full update on the numbers then.

Does Welfare Reduce Work Participation?

Michael Tanner and Charles Hughes of the libertarian Cato Institute published a report (PDF) this week evaluating the total amount of welfare benefits that individuals can collect on a state-by-state basis. What they found was pretty alarming:

The current welfare system provides such a high level of benefits that it acts as a disincentive for work. Welfare currently pays more than a minimum-wage job in 35 states, even after accounting for the Earned Income Tax Credit, and in 13 states it pays more than $15 per hour. If Congress and state legislatures are serious about reducing welfare dependence and rewarding work, they should consider strengthening welfare work requirements, removing exemptions, and narrowing the definition of work. Moreover, states should consider ways to shrink the gap between the value of welfare and work by reducing current benefit levels and tightening eligibility requirements.

That’s quite a finding, but it doesn’t really hold up under scrutiny as Josh Barro explains. But that’s not what I want to talk about. I want to assume that those findings are correct and look at their outcome on work. Tanner and Hughes include a table in their report that lists every state and the percent of adults receiving Temporary Assistance for Needy Families (TANF) benefits who are in work activities. Work activities does not necessarily mean employed; it also includes job search activities as well. So, to see if welfare disincentives people to work, we can look at which states have the highest work participation and compare that to the welfare packages they offer, right? After all, if states with substantial welfare packages also have low work participation rates, that’s a sign that welfare may act as a disincentive.

But looking at the benefit levels themselves isn’t helpful. What matters more is the purchasing power of those packages. That’s what people really care about. Five hundred dollars in SNAP (food stamps) benefits will buy you a lot more in Fargo, North Dakota than in New York City and that impacts people’s desire to work. I couldn’t find a measurement of the differences in cost-of-living in different states – possibly because it varies so much within states themselves – but Tanner and Hughes actually provide a metric that can be used as a proxy for cost-of-living: median salary. In fact, they present welfare benefits as a percent of the median salary for each state. Median salary is not a perfect proxy, but it is still a pretty good measure of the cost-of-living in each state.

Now, comparing the welfare benefits as a percent of the median salary to the work participation rate in each state can give us a better idea of the incentive effects of welfare. So, that’s what I did. Here’s a graph of the results with a best fit linear line attached:

Welfares EffectsThere’s certainly a negative correlation between welfare purchasing power and work participation, but it’s not that strong. In particular Idaho’s work participation rate of 87.9% along with its small welfare purchasing power (36.9% of median salary) is impressive. But this analysis isn’t quite right. You may be looking at the welfare benefits as a percent of median salary and are shocked to see so many percentage over 100 percent. That’s because just about no one actually qualifies for all eight of the welfare programs that the Cato Institute includes. As Barro points out in his article, most people on welfare receive SNAP and Medicaid benefits and nothing else.

However, Tanner and Hughes predicted this rebuttal and calculated the maximum amount a person can receive from just SNAP, TANF and Medicaid benefits. They were also nice enough to include a table of those benefits as a percent of median salary in each state. I then compared those numbers to work participation and look what I found:

Welfare Effects2The correlation is positive now! State’s with greater welfare purchasing power have higher work participation rates. The correlation is even less than in the previous graph so it’s not particularly meaningful. In addition, correlation does not equal causation. This could be a complete coincidence. But it should at least make you pause whenever you hear conservative claims that welfare causes people to forego their job search and mooch off other taxpayers. The evidence on it is very unclear.